Qualcomm (NASDAQ:QCOM) announced its decision last week to split the internal structure of the company into two parts to protect its strong patent portfolio from the pitfalls of open source licensing. The dominant mobile chip-maker said that the parent company, Qualcomm Incorporated, will include its licensing arm, corporate functions, and most of Qualcomm’s patent portfolio while a new, wholly owned subsidiary, Qualcomm Technologies, Inc. (QTI), will handle the firm’s R&D as well as the semiconductor business. 
The parent company, with its treasure trove of patents, will continue to license out its patents and collect royalties while the subsidiary will be involved with the open source community and have little access to patents held by the former. The restructuring will help Qualcomm contribute to the development of open source software like Google’s Android through its subsidiary without risking the sharing of important patent-related codes that could compromise its lucrative licensing business. The subsidiary will own only those patents that are related to the open source work and have “no rights to grant licenses or other rights to patents” held by the parent.
Strong wireless IP portfolio
Qualcomm is one of the largest holders of 3G patents. CDMA (Code Division Multiple Access), a wireless 3G technology that has become a world standard for the wireless communications industry, was solely developed by Qualcomm. This has allowed the company to charge royalty from handset vendors for every mobile device sold that incorporates its technology, whether or not the device uses Qualcomm’s chipset. Further, Qualcomm also licenses out its 3G technology to other chipset manufacturers that wish to sell CDMA-based chipsets to mobile manufacturers.
Emerging markets such as China and India where 3G still has a very low penetration are seeing increasing 3G adoption and are a huge growth opportunity for Qualcomm. For instance, China’s 3G subscriber base has more than doubled over the past year. Even so, its 3G subscriber base is still only a little more than 15% of the total mobile subscriber base. Growth in cell phones supporting 3G technology will bring in more revenues from license fees.
The licensing business is highly lucrative for Qualcomm due to the high margins on offer. As opposed to its chipset business which has gross margins in the 50-55% range, Qualcomm’s licensing business has close to 90% margins. While mobile chipsets contribute the most (>40%) to Qualcomm’s value, royalty revenues from 3G licensing deals also make for a significant chunk (>35%) of our price estimate.
However, the enormous growth opportunity in the mobile semiconductor market is attracting new entrants such as Nvidia, Broadcom and Intel, which could erode Qualcomm’s chipset market share. Of late, Qualcomm has been finding it hard to meet the high demand for its Snapdragon chipsets which could cause handset makers to turn to rivals.
In such a scenario, it makes sense that Qualcomm is being secretive about its patents and protect the cash cow that is not subject to the vagaries of a highly competitive mobile industry. Since Qualcomm’s 3G technology needs to be licensed out even by competitors that make 3G chipsets, Qualcomm’s licensing business is pretty much insulated from the internal competitive dynamics of the industry as long as the industry as a whole continues to grow.Notes: